Cirrus Logic, Inc. — Q3 FY2023 Form 10-Q
Reporting period: Fiscal third quarter and first nine months ended December 24, 2022; comparisons are to the periods ended December 25, 2021. Cirrus Logic develops low-power mixed-signal products and reports one operating segment.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Net sales | $590.6M | $548.3M | $1,524.8M | $1,291.5M |
| Gross margin | 50.2% | 52.8% | 50.5% | 51.5% |
| Operating income | $141.4M | $144.2M | $311.9M | $258.5M |
| Net income | $103.5M | $127.6M | $230.4M | $229.9M |
| Diluted EPS | $1.83 | $2.16 | $4.02 | $3.88 |
| Operating cash flow | Not separately presented for the quarter | $291.3M | $(133.5)M |
- Q3 sales increased 8%; nine-month sales rose 18%. High-Performance Mixed-Signal sales grew 18% in Q3 and 36% for the nine-month period, supported by higher average selling prices (ASPs) and smartphone content gains. Audio sales rose 2% in Q3 and 9% for nine months, mainly due to higher ASPs.
- Q3 gross margin declined 2.6 percentage points, primarily from higher supply-chain costs and, to a lesser extent, less favorable product mix. Nine-month margin fell 1.0 point, primarily due to supply-chain costs.
- Q3 operating income declined despite higher sales as operating expenses increased. R&D expense rose $11.0M in Q3 and $48.4M for nine months, reflecting continued product-development and employee-related investment.
- Net income was down 19% in Q3 and essentially flat for the nine-month period. Effective tax rates increased to 26.3% in Q3 and 26.5% year to date, from 11.4% and 11.8%, respectively. The filing attributes the increase principally to U.S. tax rules requiring capitalization and amortization of certain R&D costs.
Liquidity, debt, and capital allocation
- At December 24, 2022, cash and cash equivalents were $434.5M and marketable securities totaled $73.2M. Current assets were $1,013.5M; current liabilities were $228.5M.
- Operating cash flow was $291.3M for nine months, compared with $133.5M of cash used in the prior-year period. FY2023 operating cash flow included a $60.3M unfavorable working-capital change, primarily from higher receivables and inventory and lower payables and other liabilities.
- Investing activities used $24.2M and financing activities used $202.4M in the nine-month period. Financing cash use primarily reflected $156.4M in share repurchases and a $30.9M acquisition-related holdback payment.
- No borrowings were outstanding under the $300M revolving credit facility, which matures in 2026; the company reported compliance with its covenants. Management stated that expected cash generation, cash and investments, and available borrowing capacity should meet requirements for at least the next 12 months.
- The company repurchased $156.4M of stock during the first nine months. A further $500M authorization was approved in July 2022; no repurchases under that authorization had occurred by quarter-end.
Outlook, risks, and notable items
- The filing provides no specific revenue or earnings guidance. Management described a strategy of sustaining smartphone-audio leadership, expanding audio applications beyond smartphones, and developing adjacent mixed-signal markets.
- Customer concentration is significant: Apple represented approximately 88% of Q3 sales and 83% of nine-month sales. The ten largest end customers represented 94% and 92%, respectively. The company warns that reduced orders or pricing from key customers could materially affect sales, margins, and earnings.
- Management noted ongoing supply constraints and a focus on allocating supply to key customers; it is pursuing additional capacity and foundry options. Under a GlobalFoundries agreement, Cirrus paid a $60M non-refundable reservation fee and prepaid $195M for future wafers; the prepayment is expected to be credited against wafer purchases beginning in Q3 calendar 2023.
- The company cited possible adverse effects from COVID-19, inflation and consumer-demand weakness, and trade restrictions. It specifically identified U.S. export controls announced in October 2022 as a risk to sales and operations, particularly in China.
- An IRS examination of fiscal 2017–2019 returns includes proposed transfer-pricing adjustments: the IRS asserted approximately $170.5M in additional tax and $63.7M in penalties, excluding interest. Cirrus disputes the positions, intends to pursue administrative and potentially judicial remedies, and believes its reserves are adequate; an adverse resolution could be material.
- Q3 other expense was $3.7M, primarily related to an equity-investment write-down and foreign-currency remeasurement. The company also reported $32.9M of unrecognized tax benefits and $6.2M of accrued interest and penalties related to tax matters.
Key facts for investors to verify
- Whether customer demand, particularly from Apple, remains stable and how concentration affects pricing and future revenue.
- Whether higher supply-chain costs and product mix continue to pressure gross margin, and whether ASPs offset those costs.
- Cash conversion and working-capital trends, including inventory, receivables, and the timing and use of prepaid wafer balances.
- Developments in the IRS transfer-pricing dispute, including potential tax, interest, penalties, and reserve adequacy.
- Effects of export controls, trade restrictions, inflation, and smartphone-market conditions on sales and supply availability.